IRS Backs Down on Tax Deduction for Employer-Provided Meals

The IRS now concedes it was skating on thin ice when it challenged the deduction for pre-game meals furnished by the Boston Bruins to its players and personnel. Accordingly, the IRS has acquiesced to the outcome favoring the professional hockey team (Jacobs, 148 TC No. 4, 6/26/17).

On the down side for employers, this tax break has been watered down by the new Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, a business could generally deduct 50% of the cost of meals it provided to employees for its convenience, but there were certain notable exceptions. For instance, an employer was able to deduct 100% of the cost of meals that qualified as a “de minimis fringe benefit.” This included the cost of operating a cafeteria or similar eating facility established on the business premises for the benefit of employees.

In the Jacobs case, the Boston Bruins contracted with hotels for food and lodging in cities where they played their road games. Typically, the hotels provide banquet rooms where meals and pre-game snacks are served. Although the meals are available to all personnel traveling with the team, they are mandatory for players.

The team then deducted 100% of their pre-game meal costs under the exception for eating facilities. But the IRS disallowed the full deduction. When the Bruins and the IRS reached an impasse, the case went to the Tax Court.

First, the Court indicated that the meals would qualify as a de minimis fringe benefit only if they were provided in a nondiscriminatory manner. Because all the personnel traveling with the team could take advantage of the meals, the team passed this test. Second, Court assessed whether the eating facility met the requirements spelled out in the applicable regulations. This includes the following:

The eating facility is owned or leased by the employer.

The employer operates the facility.

The facility is located on or near the business premises of the employer.

The meals are furnished during or immediately before or after the workday.

The annual revenue derived from the facility equals or exceeds the direct operating costs of the facility.

The IRS argued that the facility was not located at or near the business premises of the employer. After considering the unique nature of a hockey team that plays “away games,” the Tax Court determined that this requirement was met. The hotels where the Bruins stayed are essentially the place where they are conducting business.

Furthermore, the IRS contended that the employer did not operate facility.

However, if an employer contracts with another party to operate an eating facility for its employees, the facility is considered to be operated by the employer. Thus, the team also met this requirement

Result: The Tax Court ruled that deduction for 100% of the meal costs is allowable as a de minimis fringe benefit. And now the IRS has agreed to go along with this decision.

This taxpayer victory is short-lived. Effective for 2018 through 2025, the TCJA limits the deduction for meals furnished at an employer-operating facility as a di minimis fringe benefit to 50% of the cost. After 2025, the deduction disappears completely unless it is resurrected by an act of Congress.